Law Creates Special Savings Accounts for Disabled People

People with disabilities, and their families, will soon have a tax-favored way to save money for a range of expenses.

In December, Congress passed the ABLE Act, short for Achieving a Better Life Experience. The law enables the creation of special savings accounts, modeled after the popular Section 529 education plans that many families use to save money for college. The new plans will be known as 529A accounts.

Under the new law, disabled people and families with children who have special needs can contribute to these savings accounts, and the funds can be invested and grow tax-free. Withdrawals from the accounts will not be taxed as long as the money is spent on allowed types of expenses for the beneficiary, like housing, education, transportation, health care and rehabilitation.

The 529As are expected to become available in the second half of 2015, after the Treasury Department issues regulations to define details of the accounts. Because the program will be state-sponsored — as are the existing 529 college fund programs — each state also must approve the program, or contract with another state to serve its residents. Several states already have acted, said Sara Hart Weir, president of the National Down syndrome Society, which pushed for the legislation alongside other advocacy groups including Autism Speaks and the National Federation of the Blind.

The National Down syndrome Society estimates that 5.8 million people will be eligible for the new accounts. The 529As are likely to be helpful to “anyone who has assets they want to make available for a disabled individual’s future needs,” said Leonard Weiser-Varon, a lawyer with the Boston-based law firm Mintz, Levin, Cohn, Ferris, Glovsky & Popeo.

One benefit of the new accounts is that they address a problem many disabled people and their families face. Under federal law, to qualify for federal help like Medicaid or Supplemental Security Income, or S.S.I. , which provides help for low-income people who are disabled, a person can’t have more than $2,000 in cash savings or other assets. This discourages many people with Down syndrome and other disabilities from working, since they don’t want to put their benefits at risk. It also makes it difficult for families to set aside money for longer-term expenses their children may need.

Generally, to provide for care beyond government benefits, families can set up a special-needs trust, but many don’t have the money for the legal fees to establish one. The idea behind the ABLE accounts is that they offer a lower-cost, simpler way of helping the disabled and their families save for longer-term needs without becoming disqualified from federal benefits.

Ms. Weir, of the National Down syndrome Society, described the law as the most significant piece of legislation affecting the disabled since the passage of the Americans with Disabilities Act nearly a quarter-century ago.

“This sends the message that people with disabilities can work and save money, and be as independent as possible,” Ms. Weir said.

The new accounts also send a powerful message, she said, about the potential for many people with Down syndrome and other disabilities to continue their educations. There are now more than 200 postsecondary education programs, at colleges including Clemson University and George Mason University, for people with cognitive disabilities — and they are as costly as traditional college programs, Ms. Weir noted.

The 529A accounts have an annual contribution limit of $14,000 and can grow to $100,000 without jeopardizing S.S.I. benefits, although some states may have higher contribution limits.

Here are some questions and answers about 529A accounts:

Q.Who is eligible for a 529A account?

A. To qualify you must have been disabled before age 26. Details will be established in coming regulations but in general, anyone receiving benefits like S.S.I., or meeting the disability criteria for such benefits, will be eligible; you will probably need documentation of disability, or a physician’s certification, if you aren’t currently receiving such benefits.

Q.Are contributions to the accounts tax-deductible?

A. No. Money deposited in the account by disabled people or their families and friends is not eligible for a tax deduction.

Q.Can beneficiaries have more than one 529A account?

A. No. Unlike with 529 college savings accounts, you have just one 529A account, and it must be established in the state where you live (or in the state that is designated to run the program for your home state).